Valuation Analysis of Nacho Inc.

A

To determine whether Mark King should invest in Nacho Inc. shares, let's analyze the information provided and calculate the required rate of return.

First, we need to calculate the required rate of return using the Capital Asset Pricing Model (CAPM). The CAPM formula is as follows:

Required Rate of Return = Risk-Free Rate + Beta * (Expected Market Return - Risk-Free Rate)

In this case, the risk-free rate is given as 4%, the expected market return is 8%, and the beta for Nacho Inc. is 1.25. Let's calculate the required rate of return:

Required Rate of Return = 4% + 1.25 * (8% - 4%) Required Rate of Return = 4% + 1.25 * 4% Required Rate of Return = 4% + 5% Required Rate of Return = 9%

The required rate of return for Nacho Inc. is 9%.

Now, let's compare the required rate of return to the expected rate of return. The expected rate of return is not explicitly provided in the question, but the intrinsic value of Nacho Inc. stock is given as $30 per share.

The expected rate of return can be calculated using the Gordon Growth Model, which is as follows:

Expected Rate of Return = Dividend Yield + Dividend Growth Rate

The dividend yield is given as 3.0%, but we need to calculate the dividend growth rate. To do that, we can rearrange the Gordon Growth Model formula:

Dividend Growth Rate = Expected Rate of Return - Dividend Yield

Dividend Growth Rate = Expected Rate of Return - 3.0% Dividend Growth Rate = 9% - 3.0% Dividend Growth Rate = 6%

Therefore, the expected rate of return is 3.0% (dividend yield) + 6% (dividend growth rate) = 9%.

The required rate of return (9%) is equal to the expected rate of return (9%).

Given that the required rate of return is equal to the expected rate of return, Mark King should consider investing in Nacho Inc. shares (option A: "Invest in Nacho shares"). This is because the intrinsic value of the stock ($30 per share) suggests that it is priced fairly and offers a return that meets the investor's required rate of return.